What is Payroll Tax?
The Queensland Government State Revenue Office (QRO) collects Payroll Tax from businesses where the total payroll is over $1.3M:
- Total payroll payments greater than $1.3M and less than $6.5M is 4.75%
- Total payroll payments greater than $6.5M is 4.95%
Many Medical Practices employ their admin and support staff, however, use a ‘contractor’ model for their doctors. As a result, payments to doctors aren’t counted in payroll.
This has been a common method for setting up a medical business – the ‘practice’ may have been set up legally as ‘services entity’ and doctors as contractors – instead of a true ‘medical clinic’ company. Over time though, and more recently with trends to commercialise medical practices, the lines between medical clinics and service entities have become blurred. Even if they are set up as a service entity, they’ve started to operationally be run more as medical clinics.
What’s the difference between a medical clinic and a services entity?
A Medical Clinic is established for the purpose of providing healthcare services directly to patients. Regardless of the contracts in place, if the clinic is run as a medical practice, then a contractor doctors’ income may be included in Payroll Tax assessments.
A Services Entity is established for the purpose of providing consulting suites with admin/operations support for doctors. The service entity doesn’t provide healthcare services – the doctors’ businesses are the ones who provide health services for patients. The two entities (service entity and contractor doctor’s business) are entirely separate.
Why is this an issue now?
The laws haven’t changed, in fact, the legislation governing employees vs contractors were established in 1978. There is now just better access to information available to government, and they are now seeking to enforce the rules (and collect more taxation income).
As a result, the QRO has been re-evaluating how they interpret contractors and service entities in medical practices. They are reclassifying contractor doctors for the purposes of Payroll Tax where those practices/doctors cannot validly demonstrate a contractor relationship – this will mean the practice has to pay payroll tax, back taxes and potential fines.
While it is not automatic, there is risk that the associated contractor doctors may come under the Federal Government’s vision and trigger a reassessment of the doctors’ own individual business tax returns, deductions and GST claims.
Audits have begun. There are cases in the courts, High Courts, and some precedents have been set where high profile service companies and doctors have lost their appeals. These published decisions are guiding current recommendations.
The Queensland State Budget is ramping up for audits
The 2023 State Budget is allocating an additional $24.4M to auditing/tax compliance, over $50M for debt recovery and is expecting a boost of $610M of additional revenue – the risk of audit is greatly increasing.
If you are a service entity, with contractor doctors, what are the most important things you need to do?
- Confirm that you have up to date and compliant legal contracts in place that define your Service Company, separate Contractor Doctor Companies and the agreement between them. Talk to a specialist lawyer in this area for advice. But understand, that on their own, the contracts are not enough – there must be evidence of this arrangement throughout the business.
- There are accounting processes in place that demonstrate that the flow of money comes from the patient to the doctor, to then pay service fees to the Service Company (no more Recipient Created Tax Invoices!).
- There must be evidence internally that administrative operations are aligned with this model – that the contractor doctors are independent and not being managed by the services company.
- There must be external visibility to the public that aligns with this model – the public perception must be that the patient relationship is with the doctor’s business, not the services entity. This includes your services website advertising services, and your doctors all having their own individual brand, website and marketing.
Do you need help?
We recommend speaking directly with legal and accounting professionals who have specific expertise in this area to review and establish your contracts and accounting.
If you need help to understand the implementation changes required for your services entity or contractor doctors, then contact us for a Payroll Tax Health Check of your marketing and operations.
If you (or your Practice Manager) need assistance to implement the changes, talk to our team about our packages for Service Entities and Contractor Doctors.